Is out of state investing worth it?

88 Replies

Hi everyone :)

I have been doing some research on investing in out of state properties. However, after reading and factoring all the hassles and risks of investing long distances and knowing that there are investments out there that are completely passive and yield a standard 7 to 10% returns, now I am wondering if it's worth it to invest in out of state at all.

For newbies, I think a lot of people on this forum recommend to start with turnkey properties. When I looked at some of the TK websites, the properties they featured are generating around 8 to 9% on average. If that's the case, are there any upsides of investing out of state instead of just doing passive investments like Multiple Equity, Crowd Street etc? Or am I missing something?

I know that you can probably get a higher returns if you assembly your own out of state teams and get some off market deals. But what is the ROI for doing that vs. investing in TK? Is the return significantly enough comparing to the risk and work you take.

Would appreciate your thoughts and want to hear your stories about investing in out of state vs. passive investing in funds and notes. Thank you all in advance!

@Sara W. : asking if investing OOS is "worth it" is like asking a room full of hungry first graders what snack they want - you'll get unlimited and diverse responses, and each response will be genuine, well-intentioned, and vehement. Same with OOS investors; based upon each investor's location, experience, capital and risk tolerance, you'll get a smorgasbord of feedback. 

Unsure if it helps, but instead of asking if the best play is OOS, TK or whatever, ask yourself how much of your life you want to dedicate to managing your assets and what amount of money is worth it to you to delegate that management - then reverse engineer that play. 

@Simone G. Best response I've heard all year. @Sara W. Everyone has a different definition of "worth it". I thin what Simone said was gold. Think about your goals and how you are going to achieve them. I'm in CA and I love investing OOS, it is 100% "worth it" for me. Is it for you? Question for you! 

Here is how I evaluate each investor's true interest in OOS investing. Do you want to make passive income or do you want to learn about investing in real estate? If your answer is the first one, invest in index funds and call it a day. Or buy boring turnkey investments that don't appreciate and cashflow a trickle. If you want to learn about investing in real estate, focus local to start and consider OOS when your two-hour radius is all too expensive or you have other areas where you have dedicated and trusted people who could help you build a local team. They way I do this is by starting at every town I've ever lived in, where I went to college or graduate school, where my best friends and family live - are any of those good investment markets or better than where you live? If so, would they be reliable in terms of seeing some houses and taking photos, etc. Could one be a partner? Too many people look to OOS because they think their market is too hot or too high or because they are too scared to actually do it in person. I can tell you, without any question at all, if you are evaluating OOS investing on a percentage yield, don't do it.

@Sara W. For 8-9% absolutely not I could play darts with an MLS listings sheet in most markets and blow that out of the water. (Assuming leverage is allowed) honestly if you are not getting at least 20% IRR on a relatively passive investment with a property manager than you are not getting a good deal. Both the LTR's I have out of state with a property manager and the properties I manages for STR's for others after our costs are above 20% a year if the property is leveraged. I don't know Boston but I bet you could find a 20% in your area also. When I say leverage I mean around 75% LTV even higher returns with 90% LTV vacation home loans or 95%+ house hacking loans.

Don't underestimate driving just a few hours outside your MSA for a much different real estate market - a couple hours outside most MSAs you can start seeing properties start to cash flow much better. That said, I and many other shave  started out of state investing  for higher cash flowing markets and I think it's a great way to start as a safe investment. 

Thank you everyone for your replies!

@Simone G. @Lee Ripma Thank you for your response! I absolutely agree that my definition of "worth it" is different from others', and I will be getting many different feedback and opinions from people. But that's exactly what I am looking for. I don't know what I don't know. So I want to see what people's experiences are like and what strategies that they use that work and don't work well for them, so I can do my own assessment.

As mentioned in my question, I checked out some of the turnkey solutions that other BP investors recommended, I calculated the ROI of some of the properties on the site, and compared that to my own portfolio of passive RE investments, and I don't see much of a difference. That's why I am wondering what prompts others to use a TK solution when they can invest in other RE funds or RE notes that can get them the same return but without the work or risks of owning an OOS property. I simply want to know and see if I am missing something. Maybe there are other upsides that I don't know of that other investors see in TK solution over passive RE investment.

And for those that don't use TK solutions, how do they go about getting a high ROI investing in OOS properties? I know that some investors build up an OOS team over the years that they can rely on, so I want to know what ROI they have been getting and how much work they put in and how involved they are with their OOS properties.

So even though there's no universal definition of "worth it" but the effort/risk you take should be on par with the return/benefit you get. I am curious of learning what amount of effort and risk you have put in vs the returns/benefits that you have been getting to make the OOS investing worthwhile to you. 

@Lee Ripma, you mentioned that OOS is "worth it" to you. I am assuming that you don't use a TK solution and you see a much higher return than any other passive investment vehicles out there. Do you mind sharing your experience/strategy of OOS investing, the ROI you are getting, which market you are investing in, and why you think OOS is worth it to you (much higher ROI than other passive investments out there, property appreciation, more control than passively investing in a fund or a note?)

@Zachary Beach , thank you for sharing your IRR and good to know that this is what people can expect of from OOS properties. Do you mind sharing which market do you invest in, and what strategies you use to get this high IRR? Also, how much work did you put in initially, and how involved are you still?

@Jonathan Greene GreeneGreene and @Michael Gilman   thank you for your suggestion! 

I started out investing in an area that's close to Boston and it happened to be where I grew up in. I got very lucky with this property as I got in when the market was at its bottom. Then I got into another up and coming area near Boston when it was still low and that one worked very well for me as well. But Boston and its surrounding market has been getting very hot over the years, the ROI just doesn't make any more sense to me. That's why I am searching for other alternative options like OOS.

I did think about properties within a 2 to 3 hours ride from where I live, but there are a couple of reasons why I stopped. The areas that I am interested in have gone up in value so the ROI for rental is not significantly better. I can't leverage my existing team now because they don't service those areas and I don't know anyone who live around the areas, so I would have to assembly a new team anyway. But what makes me want to look out of state is the fact that MA is very tenant friendly. And the areas with high ROI tend to be ones that are in the B- to C+ neighborhoods. I almost had an experience of having to evict someone for nonpayment, and the process was painful. So if I had a choice I would want to go somewhere that's more landlord friendly.

@Sara W. - I was on the BP podcast and I talk all about how I invest in Kansas City from CA. No, I don't buy TK. I think the big upside in RE is the ability to force appreciation, so I really have achieved very high IRRs doing that. However, I am not a one-trick pony. I invest in a lot of different ways. I have a value add multifamily portfolio out of state, I invest in companies, I invest in a software product I'm developing to make location due diligence easier for out of state investors, I still buy stocks, AND I invest passively in my own real estate syndications and other peoples syndications. 

When people see my returns sometimes they want them, but then I remind them how NOT PASSIVE they really are. The more I've done my own deals and realize the work that goes into it the more I'm quite happy to be passive. So I would suggest thinking about how active or passive you want to be! 

I invest OOS and I know it's not for everyone. Are you high level operator or do you expect everyone to do everything up your own standard? Can you see things through, solve problems as they arise, turn a loss into an education, stay vigilant, trust people but not let others make a fool out of you, have enough cash, tech savvy? The people that can do OOS successfully are people that can operate on a high level yet obsessive over deals, analysis, cash flow, financing, people management etc... I find it hard to explain but if you can understand 25% of my jibberish I think you'll my point. My bad.

It is difficult. I am in Milwaukee and an agent and long time investor and coach - I get several requests every week and I can usually tell quickly if they are willing to do what it takes. Most do not, the market has gotten so competitive in Milwaukee. As an OOS investor you are competing against many first time home buyers, many have made offers before and got bid out. And you are competing with local investors. So you have to be willing to beat both. And on top of that you carry a overhead cost burden, because doing things remotely comes with additional expenses. Buying a crappy property that nobody locally wanted is also not a good solution, buying quality is even more imprtant when you are remote!

The combination that I have seen succesful is someone who is working in one of the most expensive areas and earn a very high W2 and a very strong resolve to buy a property. The economic delta is big enough to overcome the long distance burden. Someone with a smaller economic delta will ultimatly give up, because it does not make sense - for example: Milwaukee is better than Chicago and its less than 2hrs away, but the difference in property value, rents and incoem level is not sufficient to make up for the difficulties and extra cost.

One of the key things that I did was start without a PM back in 2008. That saved quite a bit of cash flow that I needed to scale. Later one as we grew we brought on a young part time guy who works for me and handles the day to day PM. But if I would have started remote, I would have had to work with a PM from day one, slowing down my growth. I believe there is opportunity in every State, you may have to choose a different strategy. Or move - we are getting a lot of relocation clients since the start of covid!

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